Capital receipt treatment for war-damage compensation upheld; not taxable where partition vested shares and no post-partition trading conduct.

Question whether war-damage compensation paid in respect of assets formerly constituting HUF stock-in-trade is taxable as income; court applied the principle that partition in 1949 vested allotted shares as capital and that post-partition receipts relating to allotted shares are capital unless successors, by overt acts or systematic conduct, treated the claim as business stock-in-trade. No partition deed, partnership deed, or contemporaneous evidence showed appropriation or treatment as trading stock, and an election under a special scheme did not preclude capital character. Outcome: compensation held to be a capital receipt, not taxable as income for AY 1954-55.

---

---

Issues: Whether the compensation of 9,045 dollars received by each of the three heirs as war-damage compensation in respect of assets formerly constituting the stock-in-trade of a Hindu undivided family is income liable to be assessed to tax for the assessment year 1954-55.

Analysis: On the facts there was a partition of the Hindu undivided family in 1949 while the claim was pending; the allotment to each sharer vested as capital. Precedent establishes that on a partition the allotted share of the family estate, including subsequent accretions, is a capital receipt of the sharer. A contrary result requires evidence that the divided members, after partition, treated the claim as stock-in-trade by overt acts or a systematic course of conduct. No partition deed, partnership deed, or contemporaneous evidence shows that the claim was appropriated or treated by the successors as business stock-in-trade. The circumstance of the family having opted under a special scheme was held not to bar the assessees from treating the receipt as capital.

Conclusion: In favour of the assessees. The compensation received by each heir is a capital receipt and is not taxable as income for the assessment year 1954-55.

---